Even as Goldman is urgently forcing a EURUSD squeeze following its last week target revision lower to 1.15 (just as predicted on Zero Hedge), in an attempt to shake out the latest batch of weak hands (aka clients) in the second highest EURUSD net short position last week, forcing all correlation desks to bid up all risky assets and pretend all is good, Europe liquidity is now even more frozen than ever before. While earlier reports from the FAZ that Spain is next in line for the EU/IMF rescue facility may or may not be true (very likely the former, but no confirmation will be provided until after the fact), looking at the ECB's deposit facility usage paints a grim picture: usage increased by $18.4 billion through the weekend, and was at an all time high €384 billion: European banks have put aside nearly half a trillion dollars away due to concerns about counterparty risk. For those still confused why this data series indicates that the FV of the EURUSD is likely close to or at parity, the topic of the ECB's deposit facility usage was covered exhaustively by Bloomberg overnight in "Europe's Banks May Face Second Funding Squeeze Amid Sovereign-Debt Crisis."

Europe's demographic issues and future (and present) welfare state costs are both worse than those in the U.S.

On top of that, the very different political parties within each country, and the very different cultures and economies behind those, will result in different policy reactions and election results from country to country. It is going to be a wild ride.

In the U.S. on the other hand, each state has smaller divisions of national parties facing off, and although the local economies are diverse enough, the culture and politics are not nearly so wildly separated by American state as they are in Europe.

In longer term, US is in much worse shape than Europe. US sits on mountains of debts that no one can beat. 50trillion of total debt and 100trillion in unfunded liabilities. That´s 1000% of GDP, ten times the size of current GDP. Not a single european country has such a mountain of debts/liabilities. And while Europe is cutting the deficits, US is adding ever larger piles of new debt.

When markets finally wake up to the reality, dollar will be falling like a stone.

To begin with, the US is relatively under taxed compared to Europe, a 10% VAT tax in the US would service the US debt. Or, whatever mix of spending cuts and revenue increases, the US has room to move.

Most importantly though, the Euro will not survive unless the political will is found to make fiscal transfers within the Union. I believe that political will, will be found. But it will cost the Euro and the Union to do so.

Don't get me wrong, ie: Germany as a stand alone country rocks! But any political/fiscal union has consequences and Germany will have to decide if it is worth the cost/benefit.

The economist JK Galbraith, in his book The Great Crash 1929, outlines what happened during that event. While it's interesting (almost quaint) to see just how simple the financial system was then, the impact and duration of the Depression was obviously profound. Galbraith offers only a chapter on the Depression, saying it's much harder to examine the causes of the Depression than the causes of the Crash. I agree.

But, he offers that the Depression hit so hard because it began against the backdrop of a "fundamentally unsound" US economy. He listed five weaknesses (in his words):

2. "The bad corporate structure" (here he refers mostly to the web of trusts and funds that have shared and leveraged ownership of companies an each other)

3. "The bad banking structure" (mainly, that what seemed acceptable practice to banks during the boom of the 20s, was obviously absurd level of risk when seen through the perspective of the 30s).

4. "The dubious state of foreign balance" (They had a trade surplus then...)

5. "The poor state of economic intelligence" (they knew so little then, by today's standards).

So, from my perspective, by this definition, we still have a 5 for 5 "fundamentally unsound economy." Our current crisis occurs against a vastly more complex economic system:

We have worse income distribution, they'd never even dreamed up CDSs or like derivatives, the banks are in worse shape now, we are a debtor nation, and our economic knowledge, though deeper, is perhaps (to be fair) not adequate to govern all unintended consecuences of Keynesian (100 year old) policies.

I hear you brother.... love some reassurance myself. Spainish 35 index rose 1000 points in last 3 days yet they are supposedly in the middle of a sovereign debt crisis ???? How can you reconcile reality with the markets when a game changing negative situation inspires one the greatest 3 day gains the index has seen?

Exactly, and all the bullshit pop culture indicators are "bullish" such as the retail fund flows and the fact that one of the major mainstream magazines (Businessweek) featured a bear on its cover. I think we're right in this analysis. But are we right, three years early?

Or is this just the pain we have to go through as the "right shoulder" completes itself?

I convinced a lot of people of the bear scenario. I don't want to be a 1990-s Prechter.

We've been here before. In the early 70s many people knowlegable about such things, seriously feared the US economy would collapse and the stock market disappear. These were experienced professional investors and economists. The tinfoil brigade expected even worse. This was the first blossoming of the gold bugs,conspiracy theorists, survivalists, and what I liked to call the Harry Browne people.

Guess what, the rust belt did collapse, the industrial jobs went overseas, there were a few years of double digit inflation and double digit interest rates under Carter, then the crisis was under control. Then along came Reagan who revved up the Keynes machine and away we went for another lap of the track.

This crisis will blow over too eventually. The country will still be here. Big business will still sell junk to suckers. And the green kids will participate in the next new economy while laughing at the old fashioned fuddy duddies who do not understand the power of infinite debt, and how this time it's different.

Diogenes, this analysis suffers the same fatal flaw that many others do... the good ol' "we got through this before, we'll do it again". Chances are 50% we will, but one must break the anchors and look at each situation objectively. As you said, we printed or legislated our way out of every mess in the past all predicated upon the masses buying more and more every single subsequent year. We just witnessed the champagne supernova of credit expansion and that is long gone now. The moment you go the other way, the moment you cannot grow the system larger than before to not only service the debt, but create new credit, it is game over. No amount of a, b, a, b, select, select, start can give us enough lives in this game of Contra.

I'm not discounting the seriousness of the situation. Real estate did collapse, nation after nation is going bankrupt, the Gulf is awash in oil, and worse is to come.

What I am saying is that the country will pull through somehow. Everyone will lose money (except those who keep their heads and read ZH). The situation will stabilize with everyone at a lower standard of living. Then the government will start the same games and the smart young guys will come up with a new gimmick, and away we go again.

The world goes through this kind of crisis every 40 years or so. This one is far from the worst, although that will not be apparent until it blows over and everyone forgets like they always do.

In the meantime we should be looking at more of a Mr Bean future than a Mad Max.

We don't always print or legislate the problem away. There is often a period of serious recession or belt tightening with high interest rates, slow or negative growth, shrinking government services etc. as seen in the US and Britain in the late 70s, Canada and New Zealand in the nineties and in many other places.

This is the fate the world is struggling so hard to avoid. It may be true that this time really is different, we really are running out of oil etc. but the people of the world will adapt without the collapse of civilization. Even if our standard of living falls by half and we are forced to live the way Americans did in the fifties.

"the world of infinite debt" indeed. Of course Spanish equities are rallying. Governments might declare "money is dead" but debt? Now THAT'S a joke! How does one respond? You buy the Hungry PIIGS and sell Germany, sell France. Indeed "Germany announces austerity plan" says it all does it not? They of course are the actual wealth producers in the euro and as "the one's with the money" the goal is to shake 'em down, no? Hence BUY the Hungry PIIGS. And then as was said in the movie Tombstone by Doc Holliday to his girl "big nose" Kate, "I believe that's the last in this town" and so long as "she's got the getaway car ready to go" it's time to "get our of Dodge."